It is not always so easy, sadly.mrsgoldilocks wrote: ↑Fri Jun 18, 2021 9:17 am
2) if your main source of income is W2, it is in fact quite easy to "estimate" your next year tax, plus, you know how your capital gain is etc etc. You can simply use last year's tax software and quickly plug in your numbers so you know if you will be short or not. Yes, tax brackets may change but it usually won't be that off.
Unfortunately, our VITA site sees many folks whose main source of income is W-2 wages, but it can be quite difficult to project their next year's tax. That is because our taxpayers are often in multiple part-time jobs with very uncertain and highly variable hours due to factors outside their control. They might have a lot of overtime or they might have hours drastically cut.
They may also be quite uncertain about how many dependents they will be eligible to claim because the dependent rules can be quite complex and their older teen or young adult dependents may not be keeping their parents informed about their earnings, how they are spending them and whether they might be paying for more than half of their own support, whether they are maintaining fulltime student status as defined by their postsecondary institution, etc. This can also make the parents uncertain about their own filing status (Single or HoH) and/or their ability to claim various types of credits for their dependents.
Effective marginal tax rates can be extremely high and variable due to phaseouts, phase-ins, and cliff effects of many credits and other tax provisions affecting low and moderate income taxpayers, so the unpredictable nature of the income stream can translate into an even more unpredictable tax liability.